UPDATE 1-UK's Osborne hit by call for austerity rethink, downgrade

Fri Apr 19, 2013 4:48pm EDT

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By William Schomberg

WASHINGTON, April 19 (Reuters) - Britain's finance minister suffered a double setback on Friday when the head of the IMF said it might now be time for a change in his austerity push and the country lost its AAA status from a second ratings agency.

George Osborne came to the twice-yearly meetings of the International Monetary Fund this week vowing to stick to his plan to fix Britain's still-wide budget deficit.

But the pressure on him to alter course grew further when Christine Lagarde, the IMF's managing director, said the weak state of the British economy meant it was appropriate to consider a change.

Lagarde was asked in an interview on Friday with BBC television whether the government should show more flexibility.

"We are saying with this medium-term, strong anchoring of fiscal consolidation, the pace has to be adjusted depending on the circumstances and given the weak growth that we have observed lately ... now might be the time to consider," Lagarde said.

A few hours earlier, Osborne had dismissed suggestions by the IMF's chief economist Olivier Blanchard that he should consider relaxing his austerity program.

"I think he is just one voice," Osborne told reporters, adding it was more important that Lagarde had said on Thursday that the Fund was not changing its position on Britain's economy. "She speaks for the whole organization. She was clear that the IMF's position has not changed," Osborne said.

But that was before Lagarde's interview with the BBC when she used language similar to Blanchard.

The IMF has previously said Britain should consider relaxing its belt-tightening should growth slow.

Data due next week could show the British economy slipped into its third recession in less than five years in early 2013 although many economists expect it might just escape that fate.

The bad news kept on coming for the government on Friday when Fitch Ratings stripped the country of its top-notch credit rating, citing a weaker economic and fiscal outlook.

Moody's downgraded Britain in February. Standard & Poor's has said there is at least a one-in-three chance it will follow suit.

Britain's opposition Labour party seized on Friday's news to ramp up its criticism of the government's economic policy.

"When even your biggest allies - the IMF and the credit rating agencies - abandon you it really is time to put political pride aside and finally act to kickstart the economy," said Ed Balls, Labour's main spokesman on economic issues.

OSBORNE SAYS MAY NOT HEED IMF

The IMF is due to carry out an annual review of Britain's economy in May and Osborne suggested that he would not heed a formal call for a change of policy, which now seems likely after the comments from the IMF this week.

"It depends on whether you agree with that advice," he said when asked whether countries should follow IMF policy recommendations.

The IMF's so-called Article IV recommendations are often ignored by member countries.

Osborne defended his response to Britain's slowdown, saying he had already shown flexibility by allowing a target for cutting the country's debt to slip and announcing new measures to boost the housing market.

He also said the government and the Bank of England would announce "fairly shortly" changes to their Funding for Lending Scheme. It provides banks and other lenders with cheap financing if they keep or raise lending to households and businesses.

The FLS was launched last year to increase lending for mortgages and businesses but so far it has not resulted in much more borrowing by small and medium-sized companies.

Osborne said Britain's problems were small compared with those of the euro zone.

"The principal cause of uncertainty has been the weakness of the real economy in the euro zone and the ongoing problems there," he said.

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